India's industrial strategy is feeding big business, but not growth

Growing business concentration is helping big business, but not the economy

Luigi Zingales of the Chicago Booth Business School argues that we should support “pro-market” policies that improve the functioning and fairness of markets, and oppose “pro-business” policies that serve special interests, restrict competition, and impose huge costs on taxpayers. The need to promote pro-market rather than pro-business policies goes all the way back to Adam Smith.

 

India has bet not just on detrimental pro-business policies to drive its industrial development, but also on pro-big business policies. India’s industry is becoming increasingly concentrated with the Big Five gaining ground not only at the expense of overall industry, but even at the expense of the next five and the next 20 business groups. Two recent studies that were presented at a Viksit Bharat conference at George Washington University in April show the extent of this concentration and its effects on firm entry, investment, and pricing behaviour.

 

Viral Acharya and Rahul Chauhan examine firm assets and sales and show that industrial concentration fell after the 1991 liberalisation but has risen in the last decade. The Big Five — Reliance, Tata, Aditya Birla Group, Adani, and Bharti Telecom — have increased their footprint across sectors and used mergers and acquisitions to grow even larger, gaining even at the expense of the Big 6–10. They also show that mark-ups, defined as sales over variable costs, for the Big Five fell from 1990 to 2011 but have risen since, reaching 1.35 in 2022. 

 

They go on to add that greater concentration is associated with a decline in the investment-to-operating-income ratio, that the entry of firms is negatively correlated with growth prospects in that industry, and that entry is more restricted in industries where the Big Five have a larger share. They may also be able to use their deep pockets to capture market share and then raise prices. This was the case in telecom — which is now basically a duopoly between Reliance’s Jio and Bharti Airtel — where mark-ups initially fell but have risen since 2020.

 

In a more recent study of industrial concentration, Simon Commander, Saul Estrin, Naveen Thomas, and Varun Lingineni dig deeper at a more disaggregated level and try to unravel the opaque financial structures of big family groups. They merge data on family-owned companies to create a list they call the Big Family Group (BFG). Reliance, Tata, Adani, and Aditya Birla remain in their list of the top five BFGs, but Bharti Telecom is replaced by the OP Jindal family group.F

 

For India, they show that while there was some churn among the top business groups earlier, that churn has now disappeared. The top 25 BFGs have remained the same since 2010–11. They also show that the share of the top five groups (BFG-Five) is about 10 per cent of sales, and that of the top 10 groups (BFG-10) is 15 per cent, compared to 3 per cent and 5 per cent, respectively, in developed countries. They acknowledge that while India’s concentration is growing, it is not yet as high as in some Asian countries, where it is even higher.

 

They confirm that the growth of the BFG-Five has been driven by expansion into new industries. The Adani Group was present in only five sectors in 2000 but had expanded to 38 sectors by 2020. Reliance grew from 17 sectors in 2000 to 63 in 2020. The OP Jindal Group moved from nine sectors to 37 over the same period. Among the more established BFGs, Tata expanded from 43 sectors in 2000 to 69 in 2020, and Birla from 44 to 65. They also confirm that increasing concentration reduces firm entry into sectors, and that the BFG-Five raised their mark-ups from 1.45 in 2013 to 1.7 by 2020.

 

Now it could be that the BFG Five or the Big Five are more efficient, so they are able to retain higher mark-ups. It could also be that India is following an Asian-style industrial policy that relies on big business — think Korean Chaebols. But Korean Chaebols were subject to trade discipline, as the benefits they were provided were linked to exports. India, in contrast, has seen a substantial rise in tariff protection and the BFG Five are largely serving the domestic market — they are not world-class exporters. Some success has come in iPhone assembly, where Tata Electronics has taken over Wistron — but that, too, is another acquisition.

 

India always had a problem of “exit” — it was and is exceedingly difficult to close non-performing firms. The Insolvency and Bankruptcy Code (IBC) was designed to fix that problem, but it now needs fixing itself, as it has been weakened and has become terribly slow. But now increasingly India also has a problem of “entry.” As the BFGs expand their tentacles into more sectors, they make new entries more difficult. The Asian big business strategy worked in some East Asian countries, where it created world-class manufacturing export houses with strong linkages to the small and medium enterprise sector. But India’s big business is more focused on the protected domestic market and on non-tradables such as utilities, ports, and airports. 

 

The US trade deal may force some reduction in trade protection. But otherwise, all evidence suggests even more concentration. India repealed the Monopolies and Restrictive Trade Practices Act. There is plenty of evidence of regulatory capture, and the Competition Commission of India remains weak. So far, the BFGs have not been issued banking licences, as they can borrow cheaply abroad or from a pliant state banking sector. But that may be their next foray.

 

Ironically, the share of India’s industrial sector in gross domestic product has declined since 2010–11, even during this period of growing concentration (see chart). If India’s strategy of relying on big business was to help create world-class companies that would spearhead its industrial development by providing huge subsidies and tariff protection that does not seem to be working. It is helping these business groups grow even bigger, but it is not, by itself, helping India grow any faster. In fact, it may be doing just the reverse. We may be witnessing, in Dani Rodrik’s words, “premature deindustrialisation.”  

   

 

  The writer is a distinguished visiting scholar at George Washington University and author of Unshackling India (HarperCollins, 2021), which was declared the Best New Book in Economics by the Financial Times in 2022